Diversification Will Help Texas Weather the Latest Oil Bust, According to Dallas Fed Annual Report Essay
Significant Challenges Remain, but State Unlikely to See Repeat of 1980s Fallout
For immediate release: April 20, 2016
DALLAS—While the oil price collapse has downshifted Texas’ economic growth, the state is in a much better position to weather the storm than it was during the 1980s recession and banking crisis, according to the Federal Reserve Bank of Dallas’ 2015 Annual Report essay.
In a series of essays titled “After the Boom,” Fed economists take an in-depth look at both the factors that contributed to the collapse and what comes next, including the outlooks for energy, housing, banking, jobs and wages. The report also examines the potential impact of the slowdown in China’s economy on the state’s growth.
One factor in Texas’ favor during the most recent bust is that the state’s economy is more diverse now than it was in the 1980s.
“The energy industry now accounts for approximately 2 percent of Texas employment and 9 percent of GDP,” Dallas Fed President and CEO Rob Kaplan writes in the opening letter. “This is a good deal lower than the 1980s when the downturn in energy helped drag the state into a severe recession.”
A steady influx of people and firms into Texas has also helped offset the adverse effects of the decline in energy prices and support job growth, according to Kaplan. “As we look beyond 2015 and 2016, I am very optimistic about the future of this district,” he writes. “As the headwinds from energy begin to fade I believe our great strengths will come to the fore.”
The Texas banking industry is also better positioned to endure the bust than it was in the 1980s, when more than 700 banks and savings and loans failed.
“By most measures, Texas banks are on sound footing today,” write authors Kory Killgo and Robert R. Moore in “Texas Banks Enter This Downturn on Better Footing.” “Noncurrent loans as a percent of total loans are roughly 40 percent lower and profitability is higher for institutions in the state relative to those in the rest of the country.”
Texas banks are also more geographically diverse. “In the 1980s, Texas-based institutions could not establish branches outside the state; their counterparts from outside Texas could not open branches here,” the authors write. “These restrictions have since loosened, allowing a level of geographic diversification that did not exist in the 1980s.”
Nevertheless, there are some concerns, according to the report. These include a rise in noncurrent commercial and industrial (C&I) loans and the relatively high concentration of commercial real estate (CRE) loans, to which Texas banks have 60 percent greater capital exposure than banks in the nation as a whole.
Another area of concern involves housing, writes John V. Duca in “Will Oil Decline Lead to a House Price Bust?” This stems from the fact that home prices in Texas have risen much faster than in the nation since the 2008-09 financial crisis. Two measures—the ratio of house prices to apartment rents, and home affordability in terms of income and monthly house payments—indicate state home prices might face some downside risk, according to Duca. However, that risk may be less significant than the numbers suggest.
“Before the bust of the late 1980s to early 1990s, homebuilders created a significant supply overhang fueled by excessive local lending,” he writes. “During the recent oil boom, the housing supply response was much more restrained, limiting overbuilding and inventories of unsold homes that could later depress house prices.”
As a result, Texas cities that are less energy-dependent, such as Dallas, may see home prices rise more slowly over the next few years and then return to more normal levels, while cities that rely more heavily on energy, such as Houston, may see modest price declines, according to Duca.
During the 2005–14 shale oil and gas boom, Texas job growth was rapid and broad based, writes Pia M. Orrenius in “Energy Bust Bad News for Job and Wage Growth.” Under the weight of the oil price downturn, that growth slowed to 1.3 percent in 2015 and is currently forecast at 1 percent for 2016. Slowing job growth may be accompanied by increased “polarization” in wage distribution, with more jobs clustered in the highest and lowest wage categories, according to Orrenius.
“A primary reason energy booms may defy polarization trends is because they create well-paying jobs that cannot be offshored and do not require college degrees,” she writes. “… For the time being, that counteractive force has gone the way of oil prices, and we can expect recent Texas labor market trends to look a little more like those in the nation as the energy sector continues to decline.”
On the international front, while slowing economic growth in China is a significant factor in the global outlook, its impact on Texas may be more limited, writes Mark A. Wynne, in “China Slowdown: Little Headwind for Texas.” While exports are a significant factor in the Texas economy, the state’s direct trade exposure with China is relatively small, accounting for only 4.6 percent of exports in 2015, according to the report. However, if a slowdown in China creates a broader drag on the global economy that impacts Texas’ larger trading partners, such as Mexico and Canada, the effect could be felt here as well.“The upside of this global orientation is that when the global economy is doing well, Texas benefits,” the author writes. “The downside, however, is that when global growth is weak or faltering, Texas growth suffers.”
Federal Reserve Bank of Dallas